Palmer v. Jones — 53 N.Y. St. Rep. 355

Majority

p. 355

Katherine Palmer, Resp’t, v. George Jones et al, App’lts.

(Supreme Court, General Term, First Department,

Filed May 12, 1893.)

Headnote

1. Usury—Device to avoid statute.

Defendants were known as the "American Guaranty Association.” 'Plaintiff owed them money, and attempting to gain an extension of time for payment, was refused. To obtain a further loan and to gain time on a note due defendants, plaintiff executed a note payable to herself, which, defendants indorsed as “ The American Guaranty Association,” and charged as commissions for the indorsement a sum greatly in excess of the legal rate of interest procured the discount of the note by their attorney and paid the proceeds to plaintiff. A chattel mortgage was given to defendants by plaintiff as security. The payments of the commissions and of the note were to be paid to defendants by instalments before the maturity of the note. Held, that the transaction was usurious, and that the payment of the note could not be enforced.

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2. Pleading—Equity.

Where the complaint in an action to cancel a mortgage and note did not state an equitable cause of action or allege that plaintiff had no adequate remedy at law, and no demurrer was interposed, or allegation made in the answer that plaintiff had an adequate remedy at law, Held, that the court could conform the pleadings to the proof and grant relief.

Appeal from a judgment at special term directing the delivery of certain notes and chattel mortgages and annulling the same.

Plaintiff desiring to secure an extension of time and to procure a further loan from defendants, was induced by them to make a note payable to herself, which they indorsed in their business name of “ The American Guaranty Association,” procured to be discounted by their legal adviser and paid the proceeds to her. For making the indorsement they charged a commission largely in excess of legal interest, and also took' a chattel mortgage as security.

The following is the opinion of the court below.

Patterson, J. The plaintiff is entitled to the relief she demands. It is evident, not only from her testimony, but on the face of the exhibits in the case, that the defendants, Forgotston, were principals in the transactions of the loans of money mentioned in the pleadings and testimony, and that the device of their doing, business as the “American Guaranty Association ” is a method of concealing their identity. The whole transaction, as testified to by the plaintiff (and Í believe her), consisted of the most oppressive usury for the loan of a small sum of money to a' girl struggling with adversity, who gave the security directly to the defendants, Forgotston, to be enforced by them before the payment of the note to which it was collateral, in case of default in partial payments. All these payments, both of the alleged compensation for the guaranty, and of the note itself, were to be paid by instalments into the hands of the Forgotstons before (except as to a final instalment) the note matured, and these facts are sufficient to indicate the true nature of the transaction. It was simply a way of extorting money from a person in distress, or necessitous circumstances on the pretext of an alleged compensation for indorsing an indebtedness, every dollar of which would come into the hands of the defendants named before they were liable to pay anything to any person who might be made to appear as the principal creditor. The whole scheme is apparent on its face as being a mere clumsy device to make money by charging exorbitant interest, and it has not even the merit of cleverness. Contracts of guaranty, whether of collection or payment, make the guarantor liable secondarily ; but here the whole transaction, from beginning to end, both as to the amounts to be paid as commissions for the asserted guaranty and of the principal indebtedness, were to be paid in instalments to the Forgotstons. It is plainly a mere trick to cover an illegitimate business under a supposed legal form.

There are two points suggested by the counsel for the defendants to defeat the action, and the first is the want of an allegation in the complaintthat the plaintiff lias no adecúate remedy at law;

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but that sufficiently appears from the whole complaint, and is clearly established by the proofs, and if necessary the complaint may be made to conform to them. The object of the suit is to restrain the enforcement of the chattel mortgage, and to compel the surrender of the note to which that chattel mortgage is collateral ; the plaintiff having more than paid her real debt, with lawful interest. The form of the security itself is sufficient to show that there is no adequate remedy at law, for if it is to be enforced the defendants could at once take possession of the mortgaged property, and all that would be left would be a right to replevy. That would be ineffectual, for the reason that before an action could be instituted the household effects and furniture covered by the mortgage might be scattered to the four points of the compass, and the plaintiff and .her family left without even a chair to sit on. What is sought by this action is to prevent the taking possession bv the mortgagee of this property, and an adequate remedy at law, under the peculiar circumstances of the case, would not consist in leaving a person situated as this plaintiff is to an action of replevin to try title after the wrong is done which she seeks to restrain.

The other point suggested is that the mere fact of usury in a contract for the loan or forbearance of money does not constitute-a ground of jurisdiction in equity. That is so, unless there is no adequate remedy at law; and the principle may be stated even more strongly, viz., that the right to have a usurious contract annulled exists only where a defense to that contract cannot be made at law. And that is just this case. It is difficult to perceive how a defense can be made to the enforcement of a chattel mortgage which, on default in any of its conditions, operates as a bill of sale, and gives the apparent right to the holder of that mortgage to take immediate possession of the property, without suit, and remove it, before the rights of the parties can be ascertained. .There is no opportunity offered to interpose a defense. The mere fact that a person has given a security which may be avoided for usury is, of course, not sufficient to authorize a court of equity to annul a contract; but where the form of the security is such that the party giving it cannot be heard in a court of law by way of defense to an action brought upon it, it would be a failure of justice if a court of equity could not exercise its power and interpose to restrain the irreparable injury which in a case like this would result from the taking of the property by the mortgagee.

There is another consideration in this matter, and it is that the extortion of this money from the plaintiff by the Forgotstons is purely and simply a fraud. All the circumstances indicate that, under the cover of a technically worded guaranty, the defendants named attempted to carry out an illegitimate transaction of loaning money at ruinously extortionate rates of interest. The very adoption of the high-sounding name under which they did business ; the absurd attempt at concealment of their real relation to the borrower of the money ; the scheme to provide for the payment of some part of the so-called commission for guaranty before any part of the principal sum became due; the arrangement of

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partial payments in the mortgage while the note given for the money borrowed was payable in one .sum; the whole atmosphere of the transaction;_ and to cover all, the fact that the Forgotstons never signed a guaranty at all to bind them in their proper names, but resorted to the fictitious company name, and made the so-called association an ostensible guarantor, make out such a case that it is idle to talk of there being anything but a device to evade the law, and to extort money from the distress of the plaintiff. Such a scheme for grinding the faces of the poor cannot be tolerated.

Concerning the defendant De La Mare, as the proof is made, the complaint must be dismissed as to him, but without costs. As to the other defendants the relief prayed for is granted, with costs.

James C. De La Mare, for app’lts; John V. Bouvier, Jr., for respt.

This suit was brought in equity for the cancellation of certain promissory notes made by plaintiff, and indorsed by her in blank, secured by a chattel mortgage, and for the cancellation of said mortgage, upon the ground that both notes and mortgages were tainted with usury. The evidence was sufficient to support the conclusion of the learned trial judge that the whole scheme arranged by defendants, the Forgotstons, was resorted to as a cloak to evade the statute against usury. Nothing upon the facts need be added to the very satisfactory opinion of the court below. The claim that the extortionate amounts exacted from plaintiff were compensation for the guaranty given by defendants is effectually disposed of in such opinion. It is entirely competent for one to lend his credit to another, and receive a compensation therefor, but this rule of law will afford no protection to persons who resort to a legal form with a view of covering up a usurious transaction.

The only serious questions urged relate to the sufficiency of the complaint as setting forth an equitable cause of action, and the failure therein to allege that the plaintiff had no adequate remedy at law. The complaint does allege “ that the said chattel mortgage constitutes the vital part of the said loan, and is tainted with the same fraud and illegality that affects the promissory notes given by plaintiff to defendants upon the same transaction, which said notes are still in the defendants’ possession; that the defendants have threatened to sell and remove the furniture of this plaintiff, summarily, under the aforesaid chattel mortgage, by reason whereof irreparable loss and damage will be sustained by the said plaintiff, the amount of which it is at present impossible, definitely, to compute.” These allegations are claimed to be insufficient, and we are referred to Allerlon v. Belden, 49 N. Y., 373 , which has been cited with approval in subsequent cases, and which holds that “ the mere fact that the party has made an agreement, or given a security, which is void for usury, is not sufficient to entitle him to apply to a court of equity to have the contract annulled. The right to this relief exists only when, from the form of the security, the defense

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cannot be made available at law, or where the instrument sought to be avoided is a cloud upon the title to land, or some other necessity for the interposition of a court of equity is shown.”

It will be noticed that in that case, as in others that might be referred to, the question was presented by a demurrer to the coim plaint. In this case, however, no demurrer was interposed, nor was there any allegation in the answer that the plaintiff had an adequate remedy at law. Instead, the defendant submitted himself to a court of equity, and for the first time availed himself of this objection by a motion at the opening of the case. The court, having taken the motion under advisement, proceeded with the proof, and thereafter held, upon the complaint as supplemented by such proof, that it was evident that the plaintiff had no adequate remedy at law, and that within the cases it was clear that, if the plaintiff was obliged to resort to an - action to replevy the property after it had been taken from her possession, this would have resulted in irreparable damage, which the court, upon the evidence presented, should not allow. As shown by the terms of the mortgage itself, it acted as a bill of sale, and under it the defendants could have entered into possession, and forcibly taken from under plaintiff’s control the property covered by the chattel mortgage, leaving her thereafter to her remedy by an action of replevin, which, as clearly shown by the opinion of the court below, would fail to repair the injury thus resulting from a seizure of the property. In denying the motion, therefore, at the end of the proofs, the learned trial judge correctly held that, even though the complaint might have been insufficient, yet, supplemented as it was by the evidence, to which the complaint might be made conformable, it was the duty of the court to proceed to give the plaintiff such relief as, upon the evidence, it was shown she was entitled to. We see no reason to interfere with the conclusion thus reached. The defendant having interposed an answer, and proceeded to trial without in any way raising this point, or including it in any way by way of defense, it is doubtful if, for the first time, it could be raised when the trial was actually begun. In other words, where the answer does not allege that , the plaintiff has an adequate remedy at law, it is questionable whether this can be availed of upon the trial to defeat such relief as the plaintiff may show that she is entitled to. In Mtropolitan El. R. Co. v. Manhattan R. Co., 14 Abb. N. C., 208 , it is said by the learned judge writing the opinion in that case: “ Even if I, however, could find that there was no ground for equitable relief, yet, if the facts proven showed that the party was entitled to relief, the bill could not be dismissed.” In the i*e-porter’s notes to this case will be found several cases that fully sustain this view. Thus in Van Voorhis v. Kelly, 65 How. Pr., 300 , it was held that where the plaintiff was entitled to some equitable relief the action must be retained for that purpose. And again, in the reporter’s note at page 104, it is said: “ If the complaint states facts constituting a cause of action, and defendant answers, the court should afford the proper relief, whether the frame of the complaint bo legal or equitableciting Marquat v.

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Marquat, 12 N. Y., 336 , and other cases. While, therefore, under the provisions of the Code, the objection that a complaint does not state facts sufficient to constitute a cause of action is available at any stage, yet, where a cause of action is set forth, and an answer thereto is interposed, the court is at liberty to afford such relief, legal or equitable, as, upon the facts proved, should be accorded. Here the compliant alleged the making of the chattel mortgage and promissory notes, and that the defendants threatened to sell and remove the furniture of the plaintiff summarily, and that, by reason thereof, plaintiff would sustain irreparable loss and damage. While it is true the exact character of the mortgage, and its terms and conditions, to support this statement, are not set forth, we think this was sufficient to permit the court to proceed, and on proof bejng presented showing that the mortgage itself was practically a bill of sale, under which the defendants could summarily remove the property, a case was made out which conferred upon a court of equity the right to interpose to prevent the threatened injury, and it could, as suggested by the trial judge, conform the pleadings to such proof. Having seen therefrom that the plaintiff had no adequate remedy at law, the judge was not obliged, either at the beginning of the trial, or at the close of the testimony—the question not being raised by the answer—to turn the plaintiff out of court. We are of opinion, therefore, that the case was correctly disposed of, and that the judgment should be affirmed, with costs and disbursements.

Van Brunt, P. J., and Ingraham, J., concur.